Rubio’s Call for No Capital Gains Tax Is a Break With the G.O.P.

When Steve Forbes ran for president in 1996 on a plan that called for no taxes on dividends and capital gains, Mitt Romney, then a private citizen, took out a full-page ad in The Boston Globe attacking his proposal as plutocratic.

“The Forbes tax isn’t a flat tax at all — it’s a tax cut for fat cats!” Mr. Romney’s ad declared, noting that “Kennedys, Rockefellers and Forbes” could end up with a tax rate of zero, while ordinary people would be left paying 17 percent on their wage and salary income under Mr. Forbes’s plan.

The mainstream Republican position on capital gains has long been that they should be taxed at a low rate, but not zero. In 1996, Mr. Romney was supporting Bob Dole, the eventual nominee, whose campaign platform called for a 14 percent tax rate on capital gains. In 2003, President George W. Bush signed a law setting the rate at 15 percent, a policy that John McCain proposed to continue if elected in 2008. (The current maximum rate on capital gains is 23.8 percent, after tax increases that took effect in 2013.)

When Mr. Romney was the Republican nominee in 2012, he proposed to abolish the capital gains tax for moderate earners — who typically have few capital gains anyway — but not for the Kennedys, Rockefellers and Forbeses, who would have continued paying 15 percent.

But the once-fringe idea of abolishing a capital-gains tax is going mainstream this year courtesy of Senator Marco Rubio. His tax plan breaks with past establishment Republican candidates for president in its extreme generosity to taxpayers who derive their income from investments rather than work.

His plan would impose no tax at all on interest, dividends or capital gain income from stocks. It would also set a maximum tax rate of 25 percent on business income, both for large corporations and small ones. In many cases, that would mean business owners would pay a lower tax rate on profits than their employees would pay on their wages — even after counting both taxes paid by the business and those paid by the business owner directly.

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Marco Rubio, considered one of the mainstream Republican candidates, is running on a very conservative tax plan.CreditHilary Swift for The New York Times

Mr. Rubio’s tax plan has drawn attention for so-called family-friendly features, including a significantly expanded child tax credit. It has also drawn criticism from Senator Ted Cruz for imposing too high a tax rate on wage income — rates of up to 35 percent. Mr. Rubio seeks a lower top rate than is imposed today, but one higher than any other current Republican presidential candidate has proposed. Mr. Cruz’s plan, which combines a flat income tax with a value-added tax, would impose an effective combined tax rate of 24.4 percent on wages.

The fight over taxes mirrors the divide that has emerged between the Republican Party’s elite supporters and its voter base. Mr. Cruz’s and Donald Trump’s tax plans offer significantly lower tax rates than Mr. Rubio’s to the sorts of highly paid workers that form a key Republican voting constituency. But they are not as generous to people who live off investment income — a group that, not incidentally, includes many of the people who fund Republican super PACs.

To be clear, the idea that capital gains should get a preferential tax rate did not arise as a pure sop to the rich. For nearly the entire history of the American income tax, capital gains have been taxed at a lower rate than regular income. Canada, France, Britain, Germany and even Sweden all impose top tax rates on capital gains that are more than 10 points lower than their top rates on regular income.

Reduced tax rates on capital income serve three plausible policy purposes beyond being nice for the Rockefellers and the Kennedys. First, a large fraction of capital income is taxed twice, at the corporate and individual levels. Dividends are distributions of already-taxed corporate profits, while a rise in a stock price represents a rise in expected future taxable corporate profits. Second, economists generally believe the revenue-maximizing tax rate on capital gains is much lower than the revenue-maximizing tax rate on salaries. This is in large part because capital gains are voluntary; you pay only if you sell an appreciated asset, so investors are likely to respond to higher tax rates by not selling.

Third, and more controversially, some economists say capital is significantly more sensitive to tax policy than labor. That is, high taxes on capital income will do more to discourage investment than high taxes on wages do to discourage work. Capital taxes are therefore more damaging to the economy than wage taxes.

Unfortunately, recent experience with capital tax cuts has not been supportive of the idea that they will do much to lift economic growth. “There seems to have been virtually no impact of the 2001 or 2003 tax cuts on capital,” said William Gale, co-director at the Urban-Brookings Tax Policy Center and a former staff member at the Council of Economic Advisers under George H.W. Bush. He pointed to a 2015 paper from the University of California, Berkeley, economist Danny Yagan, finding that the 2003 cut in dividend taxes “caused zero change in corporate investment and employee compensation.”

The problem with proposing a zero tax rate on capital gains and dividends, rather than just a low one, is that it can rely only on the third, least-certain justification. A zero rate will more than offset the double taxation of corporate income, and is certainly well below the revenue-maximizing rate.

But it’s a big tax cut for people who are already doing well, and can be a good idea only if you really believe it will do a lot for economic growth.

A version of this article appears in print on , Section A, Page 3 of the New York edition with the headline: Once-Fringe Idea on Taxes Goes Mainstream With Rubio. Order Reprints | Today’s Paper | Subscribe